The New International Encyclopædia/Value (political economy)
VALUE (OF. value, value, fem. sg. of p.p. of valoir, from Lat. valere, to be strong, able). In political economy, a word that is most commonly used to designate the power of a commodity to command other commodities in exchange. The term is applied, however, to several other conceptions. The potential capacity of an object to meet human needs is sometimes called value — ‘value in use,’ in the terminology of the classical economists. In modern scientific economics, the term ‘utility’ has for the most part supplanted this use of the word value. Another meaning which the term value conveys is the significance of an object to an individual as the indispensable condition of a certain satisfaction. Value in this sense of the term is frequently called ‘subjective value,’ to distinguish it from ‘objective’ or ‘exchange’ value (the first conception noted above). Subjective value is of two kinds, ‘subjective use value,’ where the importance of an object is gauged by the direct satisfaction to be obtained through its consumption, and ‘subjective exchange value,’ where the importance of an object is gauged by the satisfaction it will yield indirectly, through exchange.
A distinction is usually made between ‘market value’ and ‘normal’ or ‘natural value.’ Market value is the purchasing power of a commodity in the open market on a given day; normal or natural value is the value which would prevail if competitive forces worked without friction. Market values fluctuate widely from day to day; normal values change, if at all, only with changes in the fundamental conditions of production and consumption.
The word ‘price’ is often used as synonymous with ‘exchange value.’ Economists define price as the power of a commodity to command money in exchange; value (‘exchange’ or ‘objective’) is the power of a commodity to command in exchange commodities in general.
In order to have value, an object must satisfy some human want, and it must exist in a quantity which is insufficient wholly to satisfy all desire for it. It must possess ‘utility’ and ‘scarcity.’ in the case of most commodities, limitation in supply is due to the necessity for effort or sacrifice in winning such conunodities from nature. In explaining value, economists have been inclined to emphasize one or the other of these two essential conditions. On the one hand, we have the cost theories of value; on the other, the utility theories. As representative of the cost theories we may take that known as the classical theory, derived from Adam Smith, logically developed by Ricardo, and substantially completed by Senior, Carey, John Stuart Mill, and Cairnes. According to this theory, market value is determined by demand and supply, being fixed at the point where the former just equals the latter. Value increases directly with increase in demand, inversely with increase in supply (other conditions remaining the same). In the case of commodities that may be freely reproduced without increase in cost, cost of production determines normal value. If market value is not high enough to cover cost of production some producers will turn to other industries, with the result that value will rise through decrease in supply. If, on the other hand, market value exceeds cost of production, producers will secure a profit which will lure other producers into the field, whose competition will reduce prices to the cost level. In the case of commodities produced at varying costs (e.g. the products of agriculture) values will tend to equal cost to the producer in the least favorable situation whose product is nevertheless necessary to meet the demand. The classical economists recognized a third class of conunodities, consisting of those which could not he reproduced (e.g. paintings by the old masters), and of those whose production is controlled by a monopoly. The value of such commodities, in their theory, is derived from their utility and scarcity. Such commodities were regarded as relatively unimportant: accordingly, the law that value is controlled in the long run by cost of production was held to be nearly universal.
During the second and third quarters of the nineteenth century the classical theory of value was almost universally held by economists; it serves as the basis of much of the economic thought of the present day.
A second theory of much historical importance is the labor theory of value. Adam Smith argues that in a primitive society the respective amounts of labor spent on commodities must have served as a basis for their exchange value; Ricardo in many passages speaks as though he regarded labor as the basis of exchange value, although a general examination of his work leaves no doubt that he admits the determining influence of other elements in value besides labor. The theory was adopted by Karl Marx and his followers as a theoretical basis for socialism. Whatever part of the value of a commodity falls to the landlord or the capitalist Karl Marx regarded as a deduction from the fruits of labor, since labor alone created value. The difficulty in accounting for the value of goods produced at a varying expense in labor, of goods which are not reproducible, and of those which are freely given by nature, but in quantities not adequate to the demand, deprives this theory of scientific value.
Utility theories of valm were unsuccessful in explaining the facts of value, until the second half of the nineteenth century, when the concept ‘marginal utility’ was discovered. By a well-known psychological principle, the pleasure derived from the satisfaction of any given want declines with each successive unit of satisfaction experienced. If an individual possesses a stock of goods for consinnption, some units of this stock may be so used as to yield a high degree of satisfaction; other units will yield less, and the ‘final’ or ‘marginal’ unit may yield but little satisfaction, however great the satisfaction from the first unit may have been. The absolute importance to the individual of any unit in his possession will be measured by the utility of the marginal unit, since the loss of any other unit would at once be made good by the substitution of the marginal unit. In his private economy, an individual values his goods according to their marginal utilities. In exchange, both buyer and seller compare the marginal utility of the commodity to be bought and sold with the marginal utility of money. If the seller finds that the marginal utility of the money offered him exceeds the marginal utility of the commodity for sale, he is naturally willing to sell; if the buyer finds that the marginal utility of the commodity exceeds that of the money demanded, he purchases. Naturally, many sellers would be willing to take a price less than that which they are offered; many buyers would pay more than they do rather than go without the commodity they desire. A certain munber of buyers, however, possess limited means, and would not purchase if the price rose above a certain figure. A number of sellers would hold their property rather than take a lower price. It is these buyers who are least eager to buy and sellers least eager to sell who hold the power of determining ratios of exchange, all other purchases and sales, in an open market, conforming to the values set by these.
The marginal utility theory does not deny that in the long run the values of commodities tend to correspond with their respective costs of production; but it gives a new interpretation to the fact. ‘Costs’ consist themselves in values — value of labor, capital, use of land, etc., used up in the manufacture of a commodity. These things are not valued for their own sake, but for the sake of the products for final consumption into which they enter. Naturally, these commodities are valued marginally. If pig iron in one use creates a value equal to 40, in another use a value represented by 10, the latter use will determine the value of pig iron. But under free competition there would be a tendency to increase the production of commodities in which pig iron created a value of 40, withdrawing iron, if necessary, from the less productive use. The result would be that the value of iron in the more profitable use would decline, and with it the value of the commodity into which it entered. In this way it appears as if value were determined by costs. On the other hand, the increase in value of iron in the least profitable use, resulting from the withdrawal of iron from that use, shows quite clearly that in a broad view it is the commodity for final consumption that determines the value of the elements in cost, not cost that determines values.
This theory was originated by Gossen in the fifties, but gained no attention at the time. Two decades later it was rediscovered by Jevons, Menger, Walras, and J. B. Clark, working independently. Through the consistency with which it explains the diverse phenomena of value, it has received wide acceptance, although it has been unable to displace the classical theory completely. Marshall has endeavored to reconcile the two theories, holding that cost of production and marginal utility, taken together, explain value, but that neither theory alone explains it satisfactorily. In this view he is followed by probably the majority of American and English economists. See Political Economy.
Bibliography. All standard works on economics present a general theory of value. For the classical theoiy, the best expositions are Mill, Principles of Political Economy (London, numerous editions), and Cairnes, Political Economy (New York, 1874). For the labor theory, see Marx, Capital (London, 1887). For the marginal utility theory, consult Gossen, Gesetze des menschlichen Verkehrs (Brunswick, 1854); Jevons, Theory of Political Economy (London, 1871); Clark, Philosophy of Wealth (Boston, 1894); Wieser, Natural Value (London, 1893); Smart, Introduction to the Theory of Value (ib., 1891); Marshall, Principles of Economics (3d ed., ib., 1895).